MORGAN STANLEY: The market's crazy start to 2015 will fade

Already in the first six weeks, the year has kicked off with an
uncommon number of shock events as “oil, lowflation and Greece”
have contributed to a volatile start to the year.

That’s the take of a new report from Morgan Stanley authored by
Andrew Sheets and colleagues Phanikiran Naraparaju and Serena
Tang.

Add in the Swiss National Bank’s “Black Swan” decision to break
the peg to the euro and central bankers all around the world
easing policy in an effort to reinvigorate their economies and
we’ve seen foreign exchange traders more skittish than normal.

Meanwhile, rates traders have taken interest rates – and
particularly, long bonds – through big ranges. Stocks have been a
little less volatile and some credit spreads are elevated.

But the good news according to Sheets is that the “rise in equity
and credit volatility is understandable but not consistent with
the cycle”.

We know that volatility transitions from low to high and back
again, but Sheets says there is not about to be a regime shift in
stock and credit volatility because:

Global policy has never been more accommodative, growth risks are
skewed to the upside and earnings season is encouraging so far.
We see the current spike as idiosyncratic in nature and not a
change in the vol regime.

Morgan Stanley

Indeed, Sheets highlights that equity volatility is really only
back at long-run averages.

If he’s right, that’s actually quite a bullish statement for the
US, and by extension, global stock markets. As things settle down
and as the US economy continues to strengthen, buyers will
re-enter the market free of the fear of acute downside risk.

For Forex trader like me however, it’s a different story given a
large number of “tail scenarios, from commodity weakness (via
CAD, AUD and ZAR) to ‘Grexit’ (EUR) to UK election uncertainty
(GBP)”.

With the chance of a ‘Grexit” seemingly receding after Greece
reached out to the EU with what looked like a conciliatory plan,
perhaps the worst of 2015′s volatility is already behind us.